Venture capitalists often like to say that they invest money not in technology, culture or even a business plan, but rather in people — specifically entrepreneurs. Perhaps it’s time for VCs to revisit that approach.

The fast-growing company, which makes human resources software that manages things like payroll and benefits, is no mere startup. Since it was founded in 2012, Zenefits has raised about $580 million from some big investors, including venture capital superstar firm Andreessen Horowitz, giving it a hefty value of $4.5 billion.

Even with all that funding, though, there were no fail-safes in place to stop the company from flagrantly violating the law.

Regulators in California and Washington are now investigating Zenefits for allowing employees to sell insurance without proper licenses. BuzzFeed also reported that the company created a software tool to let California sales reps fraudulently claim they had completed an online training course required to sell health insurance in the state.

Clearly, this mistake falls on Parker. But investors — Andreessen Horowitz in particular — deserve much of the blame.

It’s the job of the board of directors to ensure that the company grows not only profitably but also responsibly and legally. Until recently, Zenefits operated with just three board members: two of them co-founders, the other Lars Dalgaard, a general partner at Andressen Horowitz.

Before this scandal, Zenefits had no chief compliance officer, which made board oversight — and Dalgaard’s outsider role — even more crucial.

Zenefits CEO Parker Conrad resigned as CEO and board member.

Photo: Liz Hafalia / The Chronicle

A representative from Andreessen Horowitz said both Dalgaard and founder Marc Andreessen were too busy to comment. Zenefits declined to make new CEO David Sacks available for an interview.

Every startup wants to be a unicorn, a company worth $1 billion or more — not just for the funding but for the attention. But Zenefits shows that unicorns may not be getting the attention they need to make sure employees follow the rules. Given the problems at Zenefits, one has to wonder who’s really watching the store at the 150 or so other unicorns.

Venture capitalists excel at making money, but the case raises the question of whether they are best suited for board roles — spots they frequently fill.

The Zenefits board should get some credit for removing Conrad. But the board should have spotted the problem sooner, especially in an industry as heavily regulated as insurance. Ideally before investors decided Zenefits was worth over $4 billion.

“A thorough (review of Zenefits’ practices) should have been initiated by the board since Zenefits’ inception,” said Johanne Bouchard, a consultant who advises several boards. “While the buck stops with the CEO, the board needs to have a process to ensure corporate governance and compliance. It appears that this (state) probe could and should have been prevented.”

While it sounds noble, the VC mantra of “investing in people” harks back to an era of handshake intimacy that no longer exists in Silicon Valley.

When the venture capital business was just starting to take root in the region, the relationship between entrepeneur and investor was very casual — but also very close, said Bill Draper, founder of Draper & Johnson Investment Company, whose father started the first VC firm on the West Coast in 1959. Since there were so few VCs, competing investment firms would often collaborate with each other, especially to spot any potential problems with a startup, Draper said.

Today, venture capital is awash with money and competition. In 2015, investors poured more than $27 billion into Silicon Valley alone, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

“The biggest change is that tons of money has come in and has made the venture capital business less attractive in the sense that it is not as profitable as it once was,” Draper said. “When we were small, we needed each other. There was a lot more cooperation and informality. Today, it’s ‘feed me, feed me.’”

Andreessen Horowitz alone holds more than 200 companies in its portfolio.

In other words, venture capitalists need to invest in many more firms to earn a profit than they did decades ago. As a result, investors and the boards on which they serve are overextended, said Adam Epstein, founder of Third Creek Advisors, a consulting firm that works with pre-IPO companies.

“When boards fail to effectively oversee ‘tone at the top,’ when companies devolve into win ‘at all cost’ (culture), it’s often because the board is inexperienced or lacks sufficient time to focus thereon,” Epstein said. “In the valley, the problem is rarely (the former). It often has more to do with the fact that investors/directors often are on many boards, and also have day jobs.”

Mark Radcliffe, a partner with the DLA Piper law firm in East Palo Alto, said venture partners can effectively sit on four or five boards. But today, they are serving on as many as eight or nine.

Zenefits has added three members to the board: Antonio Gracias, founder of Valor Equity Partners; Bill McGlashan, founder of TPG Growth; and Peter Thiel, a co-founder of PayPal and of Founders Fund. All of these men have tech world credentials — but all are prolific investors with many jobs and board seats.

And nowadays, Radcliffe said, board members are keeping their seats longer because companies are taking their time time before going public or being sold.

“It’s a numbers game,” he said.

Looking ahead, boards are going to need to oversee their investments more closely, especially in the wake of the stock market’s recent volatility and the prospect of an economic downturn, he said.

So how did Zenefits miss the mark so badly?

I recently spoke to an investor in Zenefits who has worked closely with founder Conrad and who declined to be identified because he is not familiar with the company’s daily operations. While the investor says that Zenefits may have crossed the line, he believes the problems have been blown out of proportion. The rules that govern the insurance industry, he said, are complex and confusing.

More importantly, the investor suggested, entrepreneurs like Conrad are supposed to break rules, noting that Uber and Airbnb had technically operated illegally in several cities before new regulations made them legitimate.

Maybe so. But as startups and venture capitalists push further into highly regulated industries like insurance, banking and health care, they will find the rules won’t bend so easily.

The new Zenefits CEO seems to acknowledge this.

“We sell insurance in a highly regulated industry,” Sacks wrote in an e-mail to employees. “In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die.”

Thomas Lee is a business columnist for the San Francisco Chronicle. He is the author of “Rebuilding Empires,” (Palgrave Macmillan/St. Martin’s Press), a book about the future of big box retail in the digital age. Lee has previously written for the Star Tribune (Minneapolis), St. Louis Post-Dispatch, Seattle Times and China Daily USA. He also served as bureau chief for two Internet news startups: MedCityNews.com and Xconomy.com.